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PFRS 16 Is The New Lease Standard

The document discusses lease accounting under PFRS 16. It states that PFRS 16 classifies all leases as finance leases, requiring lessees to recognize a right-of-use asset and lease liability on the balance sheet. For finance leases, the lessee initially measures the right-of-use asset as the cost of the lease liability plus initial direct costs. The right-of-use asset is then depreciated over the shorter of the lease term or asset's useful life, unless ownership transfers at the end of the lease. PFRS 16 provides exceptions for short-term and low-value leases, allowing rent payments to be recognized as expenses.

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253 views

PFRS 16 Is The New Lease Standard

The document discusses lease accounting under PFRS 16. It states that PFRS 16 classifies all leases as finance leases, requiring lessees to recognize a right-of-use asset and lease liability on the balance sheet. For finance leases, the lessee initially measures the right-of-use asset as the cost of the lease liability plus initial direct costs. The right-of-use asset is then depreciated over the shorter of the lease term or asset's useful life, unless ownership transfers at the end of the lease. PFRS 16 provides exceptions for short-term and low-value leases, allowing rent payments to be recognized as expenses.

Uploaded by

Queen Valle
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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LEASE >>> is a contract or part of a contract that conveys the right to use the underlying asset

for a period of time in exchange for considerations.

PFRS 16 is the new lease standard.

Right to control the use of an asset >>> if throughout the period of use the lessee has the
right to:
 Obtain substantially all of the economic benefits from the use of the identified asset
(exclusive use)
Example of economic benefits: using, holding or subleasing the asset

 Direct use of the identified asset >> for what purpose and how the asset is used

Accounting for Leases from the point of view of Lessee

 Finance Lease Model

PFRS 16 provides that all leases shall be accounted for by the lessee as a finance lease
under the new lease standard.

The Lessee is required to make an initial entry at the start of the lease contract as
follows:

Debit: Right of use asset >> to recognize the right to use the identified asset
Credit: Lease Liability >>>>> to recognize the obligations to make payments

 Operating Lease Model

PFRS 16 also provides an exception to the general rule as stated above. In other
words, the lessee is permitted to deviate from the policy that all leases should be accounted
for using the finance lease model provided that:
1. Short-term lease
2. Low value lease

Note: The Lessee may recognize the lease payments as rent expense under the two
exceptions.

Finance Lease Accounting Explained

Finance Lease >>> transfers substantially all of the risks and rewards incidental to
ownership of an identified asset
RIGHT OF USE ASSET

Initial Measurement of Right of Use Asset>>>>> at cost on commencement date

Cost also include the following:

1. Present value of lease payments or initial measurement of the lease liability


2. Lease payments made to lessor before the start of the contract
3. Initial direct costs incurred by the lessee
4. Estimated costs of dismantling, removing and restoring the underlying asset

Exceptions from the initial measurement cost of Right of Use Asset:


 Lease Incentives
 Initial direct costs
 Leasehold Improvements
 Security Deposits Refundable

Subsequent Measurement of Right of Use Asset >> the lessee shall measure right of use
asset at cost less
accumulated depreciation and impairment
loss

Presentation >> as a separate line item in the statement of financial position or the lessee
has an alternative
Option in the line item where the underlying asset would have been
presented if owned
With adequate disclosure.

Depreciation >> Right of Use Asset shall be depreciated over the useful life when:

a) The lease transfers ownership at the end of the lease term to the
lessee or
b) The lessee is certain to exercise purchase option

In the absence of the above conditions, the lessee shall depreciate the Right of Use asset:

Over the shorter term between useful life and lease term

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